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The Ticklish Problem of Pricing E-books for Libraries

Scales of Justice or The Long Arm of the Law?

Image by Gerry Dincher via Flickr

With all the strains on library budgets nowadays, it seems odd that libraries are soon to be asked to take on even more responsibility for purchasing appropriate materials for their institutions. It seems odder still that some librarians welcome this expanded role.

As a consumer of content, a university community is a rare bird. Not only do universities consume materials that have little audience outside the academy (e.g., some research journals), they also consume textbooks (a $7 billion industry), scholarly monographs, and huge numbers of trade books, as even the most distinguished professor may choose to curl up with a mystery novel in the evening. You can tell you are in a university town simply by looking at the bookstores. For starters, university towns still have bookstores, even with so much book commerce being conducted over the Internet nowadays; and the bookshops, which often include a wide array of used books, display titles that you are unlikely to find in a town without a large intellectual community.

And beyond books, university towns have movie theaters (art houses as well as first-run megaplexes), concerts, public lectures, and just about any content type you can imagine. I have never seen anyone try to put the figures together, but I would not be surprised to learn that a university town consumes 10 times the amount of content of a non-university town of the same size.

No one would expect the university library to manage all these content types in its collection. The novels of Stieg Larrson are well and good, but do they belong in an academic library? Books on preparing taxes, movies about vampires, late-night rock concerts: these may fall outside a library’s purview.  If it were otherwise, what reduction would there be in the budget for purely academic material?  Who would want to see JAMA or the Lancet cancelled because the money is going to the Guido Brunetti mysteries by Donna Leon or the romances of Georgette Heyer?  (Both authors simply must be read, but not necessarily at the library’s expense.) A library is thus not the sole purchaser and curator of content for a university community; it is but one purchaser among several; its reach is not comprehensive nor is it intended to be.

Outside of purchasing in an individual’s consumer capacity (that is, purchases that are not professional in nature, such as of the Wallendar novels of Henning Mankel), there are three primary sources of revenue for content acquisition in the academic community: libraries, of course; students, who buy texts for classes; and faculty and staff, who buy books and serials for professional reasons. If libraries were to take on the responsibility of making purchases for students and for the faculty and staff whose current purchases go beyond a library’s collection policy and resources, the bill would be a considerable one. But this has been happening for some time and is likely to become an even more conspicuous dimension of campus content.

Let’s consider a hypothetical university press, with sales of $5 million a year. Where do those sales come from?  Perhaps 25% or $1.25 million comes from library purchases. Another 25% is likely to come from course adoptions. That leaves 50% that comes from other sources. Let’s take 10% off the top for export sales (and not inquire where those exports eventually end up, whether in a library, in a student’s dorm room, or next to the reading chair of a member of a university faculty), leaving us with 40% or $2 million. Some of that money comes from individuals unaffiliated with a university — and there are such bookish persons, but there aren’t that many of them. Most of that 40% goes to individuals with a university affiliation. For purposes of discussion, let’s say that three-fourths of individual (non-student) purchases are to members of the academic community, which comes to 30% of total university press sales. So, 25% to libraries, 25% to students, and 30% to faculty and staff, for a total of 80% of a university press’s total revenue.

In a print world, libraries are only paying for 25% ($1.25 million in the example above) of a university press’s total revenue, but when things become digital, that percentage rises, or at least the presses have a strong need to make it rise. Consider an e-book purchased by a library for $20. Now the same book is adopted by an instructor for a course. There are 30 students in the class.  The publisher hopes for a sale of all 30 books, though that is optimistic; but if the publisher’s dream came true, the course adoption would yield about $600 at retail. (After working through all the slices taken by participants in the supply chain, the publisher is likely to receive about $400 of this for academic titles, about $300 for trade titles.) The publisher’s ideal scenario is that the library’s expenditure would be $640: $20 for the library copy, $20 for a copy sold to an individual faculty or staff member, and $600 for the course adoption. But in fact the library’s actual expenditure only comes to $20.

The drop in the university press revenue is devastating. I will forebear running through the entire financial analysis here, but the drop comes to about 55% of total revenue spread across all presses and all campuses. For the $320 million U.S. university press book market, that comes to approximately $175 million. It is highly improbable that the parent institutions would want to make up the difference, even if they could.

How can this be? Very simply, the reason is that unless the e-book that the library purchases is restricted in some way through a form of digital rights management (DRM) software, the purchase of a single copy by the library now satisfies readers’ needs that were formerly comprised of three different groups (library patrons, students, and faculty and staff making individual purchases).  A library may welcome this responsibility, but may change its mind when the bill comes due.

Readers of this blog will have realized that the issues expressed here are active in the current Georgia State litigation. In that case, Georgia State is saying that one copy of a book can be used by all members of the community for all purposes, whereas the publishers are insisting that an institution has multiple uses and that each kind should carry a tariff. The courts will decide which party is right.

The difficult thing about this kind of situation is that, whatever happens at Georgia State, it is an honest conflict between libraries and publishers, for which there is no clear or fair solution. No publisher, and certainly no university press, can withstand a 55% drop in revenue. (Moving to a digital-only solution, for which the marketplace is not ready, could lower costs by 20%.)  Nor can libraries hope to pay what publishers think they should for digital copies (slightly more than 300% of the cost of a print copy — because the library, formerly 25% of volume, is now supporting 80% of volume). Thus a library wants to purchase for $16 an electronic edition of a print book priced at $20, whereas the publisher wants to charge $65.

Much discussion of this topic is heated — and it can and does lead to litigation. But if we turn down the temperature for a moment, we will see that digital media destabilizes how we conduct business and that the conflict derives not from individuals but from a shifting environment.

There are economic benefits to be gained from the migration to digital media, but to which institutions should those benefits accrue?

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About Joseph Esposito

I am a management consultant working primarily in the world of digital media, software, and publishing. My clients include both for-profits and not-for-profits. A good deal of my activity concerns research publishing, especially when the matter at issue has to do with the migration to digital services from a print background. Prior to setting up my consulting business, I served as CEO of three companies (Encyclopaedia Britannica, Tribal Voice, and SRI Consulting), all of which I led to successful exits. Typically I work on strategy issues, advising CEOs and Boards of Directors on direction; I also have managed a number of sticky turnarounds. Among other things, I have been the recipient of grants from the Mellon, MacArthur, and Hewlett Foundations, all concerning research into new aspects of publishing.

Discussion

12 thoughts on “The Ticklish Problem of Pricing E-books for Libraries

  1. Good afternoon,

    I would like to hear more about this topic. I have a few of questions:

    When you say “Moving to a digital-only solution, for which the marketplace is not ready, could lower costs by 20%.” how did you arrive at that figure? I am always trying to figure out how to balance print and electronic when dealing with the pressures that come from clients and managers along the lines of ‘isn’t it all on the web anyway?’ as they look for electronic or try to take physical space away from libraries. Knowing more about the costs of production and distribution of each format would be very useful.
    To carry your argument forward a bit, can you speculate on what the state of the publishing field will be in 5 years? I am thinking of the Amazon claim that they now sell more e-content than hard copy. How will this pan out in the publishing field? How will the supply of print vs. electronic change over 5 years?
    Libraries, being in part custodians of their collected information resources, always have the challenge with electronic format of knowing how to maintain access to it over time. This means rights to electronic content after subscriptions lapse or must be cancelled or a publication ceases. And, how to manage the currency of an electronic format (ie. how many libraries or organisations keep their microfiche readers?). Can you shed any light on this aspect of the e-publishing business?

    Thank you

    Lawrence Wardroper

    Service de la bibliothèque | Library Services
    Service administratif des tribunaux judiciaires | Courts Administration Service

    Posted by Lawrence Wardroper | Jul 12, 2011, 12:29 pm
    • There is a short answer and a long answer to this post. I will opt for the short answer here, but I may revisit the topic at greater length at a later time.

      Where does the 20% figure come from for the reduced cost of digital versus print publications? That’s the figure for paper, printing, and binding for many categories of the book business. Some book segments (e.g., college texts) have PP&B costs less than 20%, some (e.g., dictionaries) have PP&B that is higher. So, for example, take a university press book with a retail price of $30 and let’s assume that the publisher receives $23 for it. The PPB is on average between $4 and $5.

      Your mileage may vary, of course; and one thing you can count on when you write about university presses is that someone will immediately respond with an except to any generalization. But if you take the 20% figure as directional and not definitive, you will get the idea.

      Thus eliminate print and your costs potentially drop by 20%. Is this the whole story? No. But to answer that requires a much longer post.

      Posted by Joseph Esposito | Jul 12, 2011, 10:10 pm
  2. I think the statement about Georgia State is a bit misleading in this context because it concerned, not ebooks, but the digitization by GSU of chapters from print books (as well as journal articles). Presumably, if publishers had sold ebooks to the GSU library, everyone with a GSU access account could get to the content of the ebooks for classroom use. The dilemma Joe depicts here is being solved, in part, by some presses that will not put into the new digital collections being sold by UPeC/Muse, JSTOR, etc., any titles that are likely to have wide adoption potential. The trick, of course, is to predict just which those titles will have that potential. As for the breakdown in sales to different markets, Joe knows that I differ with him as far as % of sales to libraries for smaller presses, where I think the figure is more likely to be closer to 50% or more of overall sales than of 25%, partly because those smaller presses (unless they are heavily engaged in trade-oriented regional book sales) will not have as many titles of interest to a wider audience outside the academy.

    Posted by Sandy Thatcher | Jul 12, 2011, 2:13 pm
  3. Joe, the issue you’ve raised is one I’ve been struggling with for some time. How should we think about “fairness” in an information environment that has been radically transformed?

    In my experience, librarians tend to think that “fair” means “I keep all the advantages of the print environment (such as first-sale considerations) while also gaining the advantages of the online environment (such as being able to grant my patrons virtually unlimited access).” Those who suggest that such expansions of access should come with an increase in price are accused of “missing the whole point of online access.” This proposition seems fair to us in part because the marginal cost of an additional person’s online access is close to zero for the publisher.

    Publishers, on the other hand, think that “fair” means “I don’t get any less per-user revenue than I did in the print environment.” This seems fair to the publisher because the value being offered is so much greater; if the printed book (inconvenient, non-searchable, bound to a single location, usable by only one person at a time) was worth $20, then surely the online book (available remotely, fully searchable, usable at any time of the day or night, usable by multiple people simultaneously) should be worth more. In this view, the publisher’s marginal costs are beside the point; where greater value is offered, a higher price is reasonable.

    The problem, obviously, is that even if “fairness” could be defined objectively, it wouldn’t matter much, because in an uncontrolled markeplace prices don’t respond to “should” arguments. They respond only to shifts in demand and supply, and the dynamics of demand and supply have been radically disrupted by the move from print to online. This has happened in many ways, some of which you’ve nicely dissected above.

    What’s the answer? As you suggest, there probably isn’t one. As long as the prices of scholarly products remain uncontrolled, they will be determined by the movements of a weird and discombobulated marketplace. Arguably “unfair” pricing will continue to be the result. If somehow we were to turn the scholarly marketplace into a command economy, arguably unfair pricing would also be the result–only the identity of the complainers would change.

    This comment doesn’t really contribute much, does it? But now that I’ve gone to the trouble of writing it I guess I’ll go ahead and submit…

    Posted by Rick Anderson | Jul 12, 2011, 3:38 pm
  4. There’s an important distinction between DRM for *borrowers* and DRM for *owners* that’s not mentioned.

    The presence of the former allows copies to be distributed by a library in a controlled manner much like print books, and may be important to support the increasing degree of “offline” use that owners of e-reading devices now expect, while offering the potential of lower prices than a blanket site-license would tend to lead to (since you’re buying a limited number of copies, not complete use.)

    The lack of the latter allows libraries to continue their mission of preserving access to content for present and future readers, without the vulnerabilities introduced by technology change or by the changing fortunes or whims of publishers and DRM vendors.

    If libraries (or a trusted third party that libraries could rely on for backup) owned DRM-free versions that could be kept indefinitely, and adapted to whatever format and DRM scheme made sense for borrowers at any given time, I suspect ebooks would look more attractive to research libraries than they do now.

    Posted by John Mark Ockerbloom | Jul 13, 2011, 9:45 am
    • John, libraries don’t own and cannot own ebooks unless they publish them themselves. I object to your language, though not the point you are making. Ebooks can only be marketed as a license. There is no other way. This talk about ownership confuses people. The real issue is perpetual access, which does not require ownership. There is no doubt in my view that publishers have to come up with perpetual access services, probably through a NFP third party.

      Posted by Joseph Esposito | Jul 13, 2011, 9:51 am
  5. An excellent post. The distribution chain is broken; the ‘ecosystem’ is flooded. As currently construed, there are too many hands demanding to be paid and too few currently willing or able to pay the tax (sounds a lot like our economy generally). As the saying goes, “the water won’t clear till we get the hogs outta the creek.” But of course it’s not just a matter of cost or payment (as Rick argues). Bits and pieces of emerging technology and services will continues to coalesce, eventually reconfiguring a supply chain/ecosystem and redefine value in the process. As has been written before, discovery mechanisms (and preservation agreements) will likely revolutionize much of our current understanding of ‘content acquisition.’ See Leslie Lees, for example:

    http://mhdiaz.wordpress.com/2011/06/24/e-book-collection-development-for-academic-libraries-–-existing-options-and-emerging-needs/

    Posted by Michael Zeoli | Jul 13, 2011, 5:05 pm
  6. It’s an entirely different issue, perhaps, but when nobody but the publisher owns books in future, they are no longer censorship-proof (a libel suit against a publisher in the UK could result in all “copies” of a book being altered everywhere instantly) or likely to be preserved unless the preservation of culture becomes one of the missions of publishers, which would seem a rather expensive new portfolio to take on.

    Posted by Barbara | Aug 12, 2011, 2:32 pm
    • Barbara, publishers don’t own and cannot own ebooks unless they write them themselves. I object to your language, though not the point you are making. Ebooks can only be provided under a license. There is no other way. This talk about ownership confuses people. The real issue is perpetual access, which does not require ownership.

      Posted by Eric Hellman | Mar 19, 2012, 1:15 pm
      • Agree that perpetual access, not ownership, is the proper way to frame this. There is a missing bit of infrastructure here, a way to make sure these titles are always available. For things that have been purchased, we have Portico and LOCKSS. But for things that have not yet been purchased, we need a bookstore of last resort.

        Posted by Joseph Esposito | Mar 19, 2012, 1:20 pm

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